Thursday, July 22, 2010

Deficit hawks like to run tight ships and avoid deficits, even running surpluses if possible. Historically, we almost always run deficits because sovereign debt is a very different beast from private debt. Nevertheless, a "deficit hawk" would still like to keep those deficits to a minimum, even if he is smart enough to know governments can run deficits from now until eternity, so long as the debt is run up at a sustainable pace.

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Deficit doves don't care so much about the debt and place great faith in the difference between sovereign debt and private debt. They usually think very highly of fiscal policy and macroeconomic stabilization, and don't have as many of those New Keynesian caveats and qualifications about when and where to do fiscal policy.

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Lately people have been talking about "deficit chicken-hawks". Usually these are Republicans that spend like Republicans think Democrats spend. Sometimes they're disingenuous, sometimes they're just oblivious - but they aren't deficit hawks.

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Now, the Post-Keynesian blog "New Economic Perspectives" has coined the term "deficit owl". Here's the deal - a bunch of solidly liberal Keynesians like Robert Reich and Joe Stiglitz drew up a petition saying we should do more fiscal stimulus as well as put renewed emphasis on dealing with the long-term debt. Three "more Keynesian than Keynes" Keynesians - Paul Davidson (Post-Keynesian grand poo-bah), Jamie Galbraith (price-control enthusiast John Kenneth Galbraith's son), and Robert Skidelsky (Keynes's biographer that sometimes forgets the title of Keynes's magnum opus) - refused to sign because of that statement about keeping down the long-term debt.

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This is all pretty crazy. First, Robert Reich and Joe Stiglitz are on the left wing of Keynesianism, much less the broader American economic-political spectrum. If you're refusing to sign a petition by Reich and Stiglitz because you think it's too hawkish on the debt, it means you are way out in left field. Second, what the hell is a "deficit owl"??? The blog post is titled "Deficit Doves meet Deficit Owls", but I'm not even quite sure which is which. Is an owl "softer" than a dove? I guess it means the three dissenters are wiser? Who is who here? I could understand deficit dove, deficit hawk, and deficit chicken-hawk but now I'm just confused. Maybe "deficit ostrich" would be better, since they ignore the long-term debt?

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Forget the owls - I'm coining a new term (clearly the only way to get clarity is to throw yet another fowl reference on the table). I am a deficit goose.

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You see, the problem with the hawk/dove dichotomy is that it assumes a constant stance on deficits. But like a good Keynesian, I believe that when the facts change we should change our minds (what do you do?). The reasonableness of a deficit is determined by lots of things, chief among them being macroeconomic conditions. Some people question whether this "functional finance" position (essentially counter-cyclical fiscal policy) is really Keynesian - I don't think it is the heart of Keynesianism, and it definitely pre-dates it - but it's certainly consistent with Keynesianism. I'd be very surprised if Keynes wouldn't have considered himself an advocate of "functional finance", but if he wouldn't have advocated it then he should have.

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Anyway, the point is what we really need are deficit geese. Deficit geese fly south for the winter and north for the summer. When their surroundings get dismal, they change their behavior to warm up their environment. When their surroundings heat up, they take action to cool things down.

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P.S. - if any budding ornithologists reading this know anything about the migratory patterns of doves, hawks, chicken-hawks, or owls that contradicts this post, just keep it to yourself.

25 comments:

I'm something of an amateur naturalist, so I just couldn't resist this...

Most North American raptor populations migrate (some go all the way to Patagonia). This includes so-called Chicken-hawks (which are really Red-Tailed Hawks & the Cooper's Hawk - Chicken-hawks don't really eat chickens - like wolves, they got a bad name because some humans are really stupid). Though I am less familiar with them, some owls also migrate. Owls are also raptors, BTW. Finally, doves also migrate (indeed, like many bird species they migrate from dispersed areas to concentrated areas where they breed).

Also, lots of bird species which do not necessarily annually migrate will migrate if conditions are bad enough in a particular year.

One of the interesting things about geese is that they will actually turn around and re-migrate south if conditions in their northerly migratory range have not improved enough - then they will go north again in the same season to make another attempt.

Well, birds are a variety of therapods ... so it isn't really that big of a leap.

Daniel,

Puffins have a fairly narrow range due to their inability to deal with warm climates (not because of the warmth itself, but due to what the warmth does to their primary food source - plankton). Deficits equal "warmth" in this scenario.

How could you possibly be confused by "which is which"? Truth is, you weren't. The dove position was clearly identified, and Galbraith, et al. were referred to as the "wise owls". So, clearly, I was drawing a distinction between the intelligent/wise postion, taken by Galbraith, et al., and the standard dove position taken by Stiglitz, et al.

And, for the record, Keynes was well aware of Abba Lerner and his work on Functional Finance, and he communicated with Lerner on the topic, indicating that he intended to promote the idea (of allowing the government's budget position to move endogenously to maintain aggregate demand at a level consistent with full employment) at the highest levels in Britain.

Stephanie -Aha - they were identified as the "wise owls". I must have missed that. However, I did muse that "owls" might refer to "wisdom".

In this case, I'm still not sure you've identified the owls correctly, but reasonable minds can disagree.

I agree with you on Keynes and functional finance completely. That has always been my take on it. A lot of people out there (Mario Rizzo comes to mind) have disagreed. I think the sticking point for a lot of people is that it doesn't make that much of an appearance in the General Theory, because the General Theory deals more with depressed output than with the business cycle. It stands to reason that there's not much opportunity for talking about functional finance if you're not talking about cyclical activity. But, as you point out, that doesn't mean functional finance isn't Keynesian.

Hi Daniel, Since you're well-disposed toward a functional finance view. May I ask how much you've read about the pov reflected by Galbraith, Davidson, and Skidelsky? References would include work by L. Randall Wray, Stephanie Kelton, Warren Mosler, Bill Mitchell, Mat Forstater, Marshall Auerback, Pavlina Tcherneva, Scott Fullwiler, Jan Kriegel, Yeva Nersisyan, Michael Hudson, and, of course, Jamie Galbraith nad Paul Davidson? In other words, how much do you really know about what the "deficit owls" have been saying?

I can recommend some blogs to those interested. http://www.moslerconomics.com; the UMKC new Economics Perspectives blog you've already referred to, http://bilbo.economicoutlook.net/blog, and http://www.fiscalsustainability.org

Also, there's a lot of discussion of the "deficit owl" pov, also known as Modern Monetary Theory (MMT), or "functional finance," at http://www.FireDogLake.com and http://www.correntewire.com. At these last sites if you search on Modern Monetary Theory or MMT it should bring up most of the posts.

One more thing. Last April 28th some of us held a Teach-In Counter-Conference in Washington, DC at GWU. The presentations and audios, all by MMT economists, are accessible from here: http://www.netrootsmass.net/fiscal-sustainability-teach-in-and-counter-conference/

I've read Skidelsky's new book - I reacted to it in the same way that I react to a lot of the Post-Keynesian literature. His emphasis on uncertainty is important - he gets the essential element that a lot of New Keynesians, "Vulgar Keynesians", and those critical of Keynes miss - namely, uncertainty. He doesn't push the implications of uncertainty (liquidity preference and monetary disequilibrium that results) in the sort of detail that I would have liked, but he gets the point.

I try to keep up with the Levy Institute's working papers and policy papers, and through that I've definitely read stuff by Galbraith before. I'm guessing I've read some of the others you've listed through that forum as well, although I can't recall any of them specifically.

I've started working through some of these links - a lot of these simply seem to be fiscal finance points. Another link on MMT that I dug up simply defines it in terms of liquidity preference. You'll find no argument from me on any of this. This stuff forms the bedrock of what I think of macroeconomics and fiscal policy (probably thanks to this downturn - I'm not sure I would have necessarily gone down this path if I didn't see all this unfolding in front of me in such a formative period for me).

What I don't immediately see expressed in as much detail is why we shouldn't worry about the long-term debt, which so far seems to be the only major bone of contention. I'm not especially concerned with the debt - I think we have a lot of slack to work with. But Medicare does present a fundamental problem, and our anemic, perverse tax system does present a problem, if only a long-term one. I agree with you all that sovereign states with robust economies and fiat currencies have a lot of options, but I don't think that takes away all debt concerns.

I'm familiar with your even at GWU. I graduated from their policy grad school a year ago. I can sympathize with a lot of that. I'm concerned about this deficit commission and I agree social security offers little to be concerned about. Those reassurances don't take problems like Medicare off the table, though - which is a serious problem.

I think the concern you expressed above about our health expenditure problem was answered briefly and well by Davidson, Skidelsky and Galbraith in this way:

"We agree that health care costs are an important issue. But health care is a burden faced by both the public and private sectors, and cost control is a job for health policy, not budget policy. Cutting the public element in health care - Medicare, especially - in response to the health care cost problem is just a way of invidiously targeting the elderly who are covered by that program. We oppose this."

I think this is right. If we take care of the health care system, we'll also take care of the debt concern. It needs to be approached from the health care benefit/cost side and not from the budgetary restriction side.

Finally, after going through these materials you still think there's a long-term debt problem, then I have an easy way to "save" $11.8T between now and 2025 here:

Joe -How can you approach it from a cost/benefit perspective without considering the impact on the federal budget?!?!? I'm not even sure what you mean by that. If a household faces a budget constraint, they reconsider treatment options. The same goes with the government - this has to go into the equation. I can't tell you how much I cringe to compare government budget constraints to family budget constraints - I know they're not the same. But this isn't macroeconomic policy we're talking about. Medicare isn't a response to liquidity preference or an effort at macroeconomic stabilization. Not to mention the fact that Medicare payment policy, while not the only factor, is an important factor in private health care cost growth.

Stopping issuing public debt sounds interesting - I'm going to try to write a post on all this soon (I did yesterday, but then some glitch deleted most of it). I'll highlight that idea specifically - I'd be interested in learning more about it in the comment section.

You missed Joe's/Jamie's/Robert's/Paul's point on healthcare and the budget completely.

The point is that the impact on the federal budget is driven by rising PRIVATE sector health care costs. Fix that (which Obamacare didn't do at all, unfortunately) and you've gotten rid of the vast majority of the long-run projected deficits. That was the point.

In other words, of course you concern yourself with the impact on the federal budget, but the SOURCE of the problem isn't in the budget itself, but in healthcare cost growth primarily from the private sector. Even CBO projections show this. If you don't fix the latter, but you adjust public spending on healthcare, you'll just have a bunch of people (poor and elderly) w/ far worse healthcare, and not much else. Problem not solved. Crisis not averted.

"How can you approach it from a cost/benefit perspective without considering the impact on the federal budget?!?!? I'm not even sure what you mean by that. If a household faces a budget constraint, they reconsider treatment options. The same goes with the government - this has to go into the equation."

Of course, I agree with Scott Fullwiler's comments. But in addition, when I said "cost-benefit" I had the following in mind. Since the Government is not like a Household, especially insofar as it is the creator and not simply the user of currency, the cost of Government spending never is the money itself. Its mere creation, especially in these days of electronic money is virtually costless.

Where both cost and benefit come in is in the impact of that Government spending, its negatively and positively valued consequences. We have to judge any Government expenditure by looking at those consequences and by analyzing the balance of real benefits to real costs, not simply USD benefits to USD costs.

It isn't easy to evaluate benefits and costs in these terms. It is political as much as it is economic. But I think that's what policy analysis is really about and that's also what fiscal responsibility is really about. It is not as the Administration would have us believe about deficits, debts, and debt-to-GDP ratios in the abstracts. Deficits sometimes matter, but not qua deficits. They matter because some part of Government spending may have inflationary effects where it is out-running productive capacity.

When this happens we must cut Government spending, not because it has violated some pre-determined public debt-to-GDP ratio standard, but because some of it has caused or will cause aggregate demand to exceed productive capacity and cause inflation.

What the wise "deficit owls" are really saying in the end is that we should manage Government relative to our expectations about what its real results will be, and forget indicators of fiscal responsibility and sustainability that apply to households, corporations, City and state Governments, nations that have given away their currency sovereignty and any other entities that have external budgetary constraints. Such standards should not be applied to Governments sovereign in their own currency. Such Government have no Governmental Budgetary Constraints (GBC). There only real constraints are their assessments of what the effects of their spending is likely to be.